Sundaram Finance Ltd.
Demerger Event Update
February 2017
Page 2
Sundaram Finance Ltd.
Demerger Event Update
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Stock Performance (%)
1m 3m 12m
SUF 9% 12% 20%
Sensex 6% 12% 21%
Bankex 10% 13% 46%
Date 22 Feb, 2017
Market Data
SENSEX 28762
Nifty 8908
Bloomberg SUF IN
Shares o/s 111mn
Market Cap Rs. 153bn
52-wk High-Low Rs. 1,575-1,089
3m Avg. Vol Rs. 51mn
Latest Shareholding (%)
Promoters 36.1
Institutions 15.9
Public 48.0
Among the many reasons placing Sundaram Finance (SUF) on an exalted pedestal viz. clear cut emphasis on asset
quality over growth at all times, an enviable repeat customer base, a seasoned management team, frugal capital
consumption leading to consistently high return metrics, we believe it is SUF’s end to end understanding of the market
led by the group’s positioning (auto manufacturer, OEM supplier and financier) which singles out the company in a
hypercompetitive landscape. The current scheme of demerger offers a different facet of this positioning with
significant potential for value unlocking; our calculations suggest ~12-14x increase over the carrying value of
investments. While we do see a modest ~60bps impact to RoE in the standalone business, this is more than offset by
the valuation SFIL (Sundaram Finance Investment Limited) is likely to command. In addition, the scheme brings with it
the benefits of ring fencing financial assets - a path of action espoused by the RBI, administrative efficiencies, higher
productivity and simplification of the balance sheet.
While we continue to believe that SUF is a multi-year compounding opportunity in the asset and home financing segments, we
take note of the subdued profitability of the core business led by intensifying competition (specifically in the cars segment),
lacklustre performance of the insurance business and under-performance in the home finance subsidiary. Nonetheless, the conservative business philosophy of the management, coupled with a conducive rate environment and a return to growth in the
core business provides comfort. Making use of the arbitrage opportunity/value unlocking, we upgrade our rating to BUY
with a target price of Rs.1,592, valuing SUF at Rs.1,460 and SFIL at Rs.132*.
Key Highlights:
The Scheme: 1) Merge Sundaram Insurance Broking Services Ltd and Logistics Solutions Ltd with SUF. 2) Shared services
division of Sundaram BPO to be demerged into SUF 3) SUF to demerge select shared service businesses, non-FS investments
along with select real estate assets to Sundaram Finance Investments Limited. From an investor’s perspective 1) and 2) above
are value neutral.
Consideration: All shareholders of SUF will receive one share of SFIL free of cost for every share held in SUF; SFIL will
subsequently list on the stock exchanges.
Value Unlocking: Of the 18 non-financial holdings, 12 were subsidiaries or associates while 6 were non-current investments. Against a carrying value of Rs.1.5bn, we arrive at a market value of Rs.19.9bn, a potential value unlocking of 13x.
Impact on Core Business: Dividends accruing from the non-financials investments accounted for 10% of PBT. Post the
demerger these dividends will accrue to SFIL. Consequently, we see a ~10bps and ~60bps impact to FY18 RoA and RoE
respectively.
ABHINESH VIJAYARAJ [email protected] +91 44 4344 0006
NISHANT RUNGTA [email protected] +91 44 4344 0033
NAVIN BABU E S [email protected] +91 44 4344 0065
Year NII (Rs. mn) PAT (Rs. mn) ROE (%) ROA (%) ABV (Rs.) P/E (x)
FY16 10,947 4,773 15.2% 2.4% 290 23.5
FY17E 11,870 4,822 13.9% 2.1% 318 23.0
FY18E 13,723 5,115 13.6% 2.0% 339 21.9
FY19E 15,610 6,165 14.9% 2.1% 381 17.5
CMP
Rs. 1,381
Target
Rs. 1,460*
Rating
BUY
Page 3
Sundaram Finance Limited (SUF)
Financial Services Investments (Rs.10.24bn) Non-Financial Services Investments # (Rs.1.4974bn)
Royal Sundaram General Insurance (Rs. 6.41bn)
Sundaram AMC (Rs.1.85bn)
Sundaram BNP Paribas Home Finance (Rs.1.52bn)
Sundaram BNP Paribas Fund Services (Rs.178.5mn)
Sundaram Trustee Company
Sundaram Finance Investments
Sundaram Insurance Broking
LGF Services
Equifax Experian
Other FS investments (Rs.281.9mn)
Flometallic
Automotive Investments (Rs.1.2bn)
Sundaram Hydraulics
Axles India
IMPAL
Transenergy
Vishnu Forge
Delphi TVS
Dunes Oman
Sundaram Clayton
Wheels India
Turbo Energy
Sundaram Dynacast
Lucas TVS
Brakes India
SBSL
BPO Investments (Rs.263mn)
SBIL
TVS Investments*
Other Investments (Rs.31.5mn)
Techtran Polylenses
Figures in brackets indicate book value of investments on SUF balance sheet as on 31 March 2016
# Non FS Investments proposed for demerger. Non-FS investments refer to investments in these 18 companies
* TVS Investments is the holding company for TVS Capital Funds, TVS Electronics
Sundaram Finance (SUF) – Investment Portfolio as on March 31, 2016
Source: Spark Capital Research
Page 4
The Board of Directors of SUF has approved and recommended a composite scheme of arrangement under sections 230 – 232 of the
Companies Act, 2013. Following are the key steps involved in the process*:
Step 1: Sundaram Insurance Broking Services Limited and Infreight Logistics Solutions Limited to merge with SUF.
Step 2: Sundaram BPO India Limited comprises of 2 divisions: (i) shared services division i.e. division catering to companies in SUF group;
(ii) Third Party division. The shared services division of Sundaram BPO to be demerged into SUF.
Step 3: SUF will demerge select shared service businesses, non-FS investments, along with select real estate assets to Sundaram Finance
Investments Limited.
Parameter Detail
Swap ratio 1:1 to all shareholders of SUF
Appointed date April 1, 2016
Shareholding pattern post demerger 26.47% - SUF (as promoter)
73.53% - All shareholders of SUF as per the swap ratio
Regulatory approvals required SEBI, Competition Commission of India (CCI), National Company Law Tribunal (NCLT) and
other regulators/ authorities as applicable
*All steps pursuant to the scheme of arrangement
Scheme Mechanics
Other Key Scheme Details
Source: Spark Capital Research
Page 5
Before Demerger
Promoters Public
SUF
Financial Services
Investments
Non-Financial Services
Investments
36.18% 63.82%
After Demerger
Promoters Public
SUF
Financial Services
Investments
Non-Financial Services
Investments
36.18% 63.82%
SFIL*
26.47%
73.53%
Issue of
Shares
* Select shared services businesses and select real estate assets will also be
demerged into SFIL Proposed Shareholding pattern of SFIL post demerger Shareholding pattern as on 31 December 2016
Scheme Mechanics – Entity Structure
Source: Spark Capital Research
What is the likely market valuation for Sundaram Finance Investments Ltd. (SFIL)?
Page 6
Companies Type PAT in FY16
(Rs.mn)
PE Multiple on
FY16
Valuation
(Rs.mn) % Stake Held
Stake adjusted Value
(Rs.mn)
(A) (B) (A)*(B) = ( C ) (D) ( C )*(D) = ( E )
Sundaram Clayton Ltd.* Listed 2,440 27.6 67,292 11.2% 7,560
Wheels India Ltd.* Listed 400 55.2 22,085 11.1% 2,448
India Motor Parts & Accessories Ltd.* Listed 270 23.4 6,329 18.5% 1,172
Brakes India Private Ltd. Unlisted 3,150 20.0 63,000 6.7% 4,202
Turbo Energy Private Ltd. Unlisted 1,250 25.0 31,250 32.0% 10,000
Lucas-TVS Unlisted 440 12.0 5,280 5.3% 281
Delphi TVS Diesel Systems Unlisted - 15.0 - 3.2% -
Dunes Oman LLC (FZC) Unlisted 610 20.0 12,200 43.7% 5,330
TVS Investments Unlisted 90 5.0 450 15.0% 67
Flometallic Unlisted 160 18.0 2,880 40.6% 1,170
Axles India Unlisted 130 18.0 2,340 38.8% 908
Sundaram Business Services Ltd. Unlisted - 10.0 - 100.0% -
Sundaram BPO India Ltd. Unlisted 1 10.0 5 84.3% 4
Total (Rs. Mn) 8,941 213,111 33,144
Holding Company Discount (F) 40%
Fair Value of SFIL (Rs.mn) ( E )*(1-F) = (G) 19,886
Stake held by SUF in SFIL (H) 26.47%
Fair value of stake held by SUF (Rs.mn) (G)*(H) = (I) 5,264
Per Share value unlocking for SUF (Rs. Per share) 47.4
No. of shares outstanding for SFIL (in mns) (J) 151.1
Per Share Value of SFIL (Rs. Per share) (G)/(J) 131.6
*The Valuation figures for Sundaram Clayton, Wheels India, and India Motor Parts represent the market cap of these companies as of Feb 21, 2017
The investments in various non-financial entities which were
carried at a book value of Rs.1.5bn on the books of SUF will now
be valued at Rs.19.9bn when they sit as investments on the
books of SFIL (at the holding cost).
Pursuant to the scheme of arrangement, SUF’s non-financial
assets are to be demerged into SFIL at book value (holding cost).
Since the book value of investments is small relative to SUF’s net
worth (Rs.1.5bn. vs Rs.33.13bn.), the demerger does not
materially impact the balance sheet strength of SUF.
This is in effect a ~13x value unlocking for the company which
were until now valued at cost (Rs.1.5bn) Source: Spark Capital Research
What is the likely impact on SUF on account of this reorganization?
Page 7
Assessing the impact on SUF on
FY18 numbers Pre Demerger Post Demerger Variance
Net Worth (Rs.mn) 40,415 38,967 -4%
NII (Rs.mn) 13,723 13,723 0%
Other Income (Rs.mn) 1,262 752 -40%
PAT (Rs.mn) 5,462 5,115 -6%
ROA 2.1% 2.0% -10 bps
ROE 14.2% 13.6% -64 bps
Book value per share (Rs.) 364 351 -4%
Adjusted book value per share (Rs.) 352 339 -4%
EPS (Rs.) 49.2 46.0 -6%
Impact on Net Worth in FY18 is on account of:
1. Lower Other Income accretion due to lower
dividends
2. Reduction on account of transfer of
investments (of Rs.1.5bn) from SUF’s books
to SFIL’s books. SUF would only get 26.47%
stake in SFIL in return for a transfer of 100%
of Rs.1.5bn investments.
Impact on Other Income in FY18 is on account
of:
• Lower dividends which will accrue to SUF
going forward. SUF had dividend of
Rs.692.3mn in FY16 from the non-FS
investments. However, now that SUF will
have a 26.47% stake in SFIL, the dividend
accruing to SUF will also be limited to
26.47% of total dividends distributed.
Impact on profitability and book value per share
on account of
• Net worth going down on account of transfer
of investments to SFIL.
• Lower dividend income resulting in lower
PAT
Thus, the ROE is impacted by ~60bps and ROA
by ~10bps. We believe that the impact on profitability and the book value on account of this
demerger is modest and will not impair the underlying valuations of the company
due to value unlocking in SFIL. This is explained in depth in the SOTP slide
(no.8).
Source: Spark Capital Research
Page 8
How does the SOTP valuation for SUF stack up post demerger?
SOTP Valuation for SUF (Rs. Per Share) Pre-Demerger Post-Demerger
Core business value @ 3.6x Dec’18E 1,022 1,014
Housing business @ 1.8x Dec’18E 90 90
AMC @ 5% Dec’18E AUM 139 139
Insurance @ 1.1x Dec’18E GWP 157 157
Other Investments @ 4x Investments 54 14
Total value per share 1,461 1,413
Investment in SFIL 47
Total Value per share including SFIL investment 1,460
Share Price of SFIL (upside for existing investor in SUF) 132
Total upside for an existing shareholder in SUF 1,592
CMP (Rs.) 1,381
Upside % from CMP 15.3%
Market Capitalization of Combined Entities Rs. Mn
Market Cap of SUF as on Feb 21, 2017 153,440
Less: Value of investments being transferred (4x BV of investments) 4,483
Add: Value of investment in SFIL (26.47% stake in SFIL) 5,264
Total Valuation of SUF upon demerger (A) 154,221
Total Valuation of SFIL (as arrived on slide no.6) (B) 19,886
Total combined market valuation post value unlocking (A)+(B) 174,107
Impact on Core business valuation due to
• Lower book value on account of lower
accretions resulting from lower dividend.
Investments in SFIL to accrue to SUF’s
valuation post demerger. Value unlocking
upon demerger is estimated at Rs.47 per
share.
Existing shareholders in SUF to get one
share in SFIL. This may translate into per
share value of Rs.132 upon listing of SFIL.
Please refer to slide no.6 for detailed
calculations on SFIL’s valuation.
As per our estimates, an existing investor
stands to gain one share of SFIL and
consequently look at an upside of >15%
based on CMP. This is after a conservative
estimate of the various investments based on
trailing numbers and after ascribing a hefty
40% holding company discount on trailing
numbers. We believe the upside could be
material based on price discovery upon
listing of SFIL.
Financials of Investments being Demerged
Page 9
FY16 Financials - Figures in Rs.mn Sales EBITDA EBITDA
Margin PAT Net Worth
Capital
Employed
Debt to
Equity ROCE ROE
Sundaram Clayton Ltd. 126,000 8,900 7.1% 2,440 14,020 34,410 1.04 14.1% 17.8%
Wheels India Ltd. 20,160 1,730 8.6% 400 4,080 7,940 0.95 10.3% 10.1%
India Motor Parts & Accessories Ltd. 5,020 310 6.2% 270 2,320 2,450 0.06 11.2% 12.0%
Brakes India Private Ltd. 34,960 4,510 12.9% 3,150 14,020 14,600 0.04 21.6% 22.9%
Turbo Energy Private Ltd. 9,230 1,780 19.3% 1,250 8,960 9,060 0.01 14.7% 14.9%
Lucas-TVS 22,800 1,160 5.1% 440 9,000 11,040 0.23 5.7% 5.0%
Delphi TVS Diesel Systems 7,690 960 12.5% - 2,830 6,760 1.39 3.6% -0.2%
Dunes Oman LLC (FZC) 3,420 880 25.7% 610 2,120 2,600 0.23 24.7% 28.4%
TVS Investments 6,170 160 2.6% 90 1,250 1,840 0.28 7.5% 6.2%
Flometallic 1,980 350 17.7% 160 1,010 1,870 0.85 12.0% 17.0%
Axles India 4,940 320 6.5% 130 820 960 0.17 16.7% 16.5%
Sundaram Business Services Ltd. 240 6 2.5% - 70 100 0.51 0.0% 0.0%
Sundaram BPO India Ltd. 160 4 2.5% 1 100 110 0.07 0.0% 0.5%
Financial Summary – Pre Demerger
Page 10
Abridged Financial Statements Key Metrics
Rs.mn FY16 FY17E FY18E FY19E FY20E FY16 FY17E FY18E FY19E FY20E
Profit & Loss Growth ratios
Net Interest Income 10,947 11,870 13,723 15,610 17,716 ABV per share 10% 10% 11% 13% 13%
Other Income 1,626 1,117 1,262 1,425 1,338 AUM growth 10% 15% 13% 13% 14%
Total Income 12,573 12,987 14,985 17,035 19,054 Borrowings 0% 15% 13% 13% 14%
Operating Expenses 4,930 5,079 5,692 6,404 7,164 NII 1% 8% 16% 14% 13%
PPOP 7,643 7,908 9,293 10,631 11,890 PAT 5% 1% 13% 19% 12%
Provisions 811 888 1,319 1,124 1,216 EPS 5% 1% 13% 19% 12%
PBT 6,832 7,020 7,974 9,507 10,674 Asset-Liability Profile
PAT 4,773 4,822 5,462 6,512 7,312 Leverage (x) 5.4 5.3 5.4 5.5 5.5
Balance Sheet Core Tier 1- CAR 14.8% 14.5% 14.3% 14.3% 14.3%
Net worth 33,126 36,491 40,415 45,322 51,029 Profitability and Efficiency
Paid Up Capital 1,111 1,111 1,111 1,111 1,111 GNPA 2.1% 2.2% 2.4% 2.1% 1.9%
Reserves 32,015 35,380 39,304 44,211 49,918 Net Interest Margin 6.4% 6.2% 6.3% 6.3% 6.3%
Others Capital Instruments ROA (incl Off B/S) 2.4% 2.1% 2.1% 2.2% 2.2%
Borrowings 125,867 144,636 163,827 185,881 211,122 ROE 15.2% 13.9% 14.2% 15.2% 15.2%
Total Liabilities & Net worth 173,926 194,800 219,474 247,959 280,752 Cost/Income 39.2% 39.1% 38.0% 37.6% 37.6%
Advances 178,950 205,741 233,040 264,411 300,316 Dupont Analysis
Fixed Assets 2,784 2,654 2,465 2,255 2,025 NII/Total Assets (On+Off) 5.4% 5.3% 5.4% 5.4% 5.4%
Net Current Assets 8,882 13,910 16,908 20,552 24,981 TI/Total Assets (On+Off) 6.2% 5.8% 5.8% 5.9% 5.8%
Total Assets 173,926 194,800 219,474 247,959 280,752 Opex/Total Assets (On+Off) 2.4% 2.2% 2.2% 2.2% 2.2%
Off Balance Sheet Assets 36,574 46,292 52,434 59,492 67,571 PPOP/Total Assets (On+Off) 3.8% 3.5% 3.6% 3.7% 3.6%
Total Assets (incl. Off B/S) 210,500 241,092 271,908 307,451 348,323 Provisions/Total Assets (On+Off) 0.4% 0.4% 0.5% 0.4% 0.4%
PAT/Total Assets (On+Off) 2.4% 2.1% 2.1% 2.2% 2.2%
Shares outstanding (mn) 111 111 111 111 111 Valuation
Current market price (Rs.) 1,375 1,375 1,375 1,375 1,375 Book Value per share (Rs.) 298 328 364 408 459
Market capitalization (Rs. mn) 152,790 152,790 152,790 152,790 152,790 Adj Book Value per share (Rs.) 290 318 352 397 449
Earnings per share (Rs.) 43.0 43.4 49.2 58.6 65.8 P/ABV (x) 5.4 4.6 3.8 3.1 2.6
Dividend per share (Rs.) 11.00 11.00 11.50 12.00 12.00 P/E (x) 23.4 22.8 19.6 15.8 13.3
Financial Summary – Post Demerger
Page 11
Abridged Financial Statements Key Metrics
Rs.mn FY16 FY17E FY18E FY19E FY20E FY16 FY17E FY18E FY19E FY20E
Profit & Loss Growth ratios
Net Interest Income 10,947 11,870 13,723 15,610 17,716 ABV per share 10% 10% 6% 13% 13%
Other Income 1,626 1,117 752 915 828 AUM growth 10% 15% 13% 13% 14%
Total Income 12,573 12,987 14,475 16,525 18,544 Borrowings 0% 15% 13% 13% 14%
Operating Expenses 4,930 5,079 5,692 6,404 7,164 NII 1% 8% 16% 14% 13%
PPOP 7,643 7,908 8,783 10,121 11,380 PAT 5% 1% 6% 21% 13%
Provisions 811 888 1,316 1,121 1,213 EPS 5% 1% 6% 21% 13%
PBT 6,832 7,020 7,467 9,000 10,167 Asset-Liability Profile
PAT 4,773 4,822 5,115 6,165 6,964 Leverage (x) 5.4 5.3 5.5 5.6 5.7
Balance Sheet Core Tier 1- CAR 14.8% 14.5% 13.8% 13.8% 13.7%
Net worth 33,126 36,491 38,967 43,527 48,886 Profitability and Efficiency
Paid Up Capital 1,111 1,111 1,111 1,111 1,111 GNPA 2.1% 2.2% 2.4% 2.1% 1.9%
Reserves 32,015 35,380 37,856 42,415 47,775 Net Interest Margin 6.4% 6.2% 6.3% 6.3% 6.3%
Others Capital Instruments ROA (incl Off B/S) 2.4% 2.1% 2.0% 2.1% 2.1%
Borrowings 125,867 144,636 163,827 185,881 211,122 ROE 15.2% 13.9% 13.6% 14.9% 15.1%
Total Liabilities & Net worth 173,926 194,800 218,339 246,778 279,523 Cost/Income 39.2% 39.1% 39.3% 38.8% 38.6%
Advances 178,950 205,741 233,040 264,411 300,316 Dupont Analysis
Fixed Assets 2,784 2,654 2,465 2,255 2,025 NII/Total Assets (On+Off) 5.4% 5.3% 5.4% 5.4% 5.4%
Net Current Assets 8,882 13,910 16,908 20,552 24,981 TI/Total Assets (On+Off) 6.2% 5.8% 5.7% 5.7% 5.7%
Total Assets 173,926 194,800 218,339 246,778 279,523 Opex/Total Assets (On+Off) 2.4% 2.2% 2.2% 2.2% 2.2%
Off Balance Sheet Assets 36,574 46,292 52,434 59,492 67,571 PPOP/Total Assets (On+Off) 3.8% 3.5% 3.4% 3.5% 3.5%
Total Assets (incl. Off B/S) 210,500 241,092 270,773 306,271 347,094 Provisions/Total Assets (On+Off) 0.4% 0.4% 0.5% 0.4% 0.4%
PAT/Total Assets (On+Off) 2.4% 2.1% 2.0% 2.1% 2.1%
Shares outstanding (mn) 111 111 111 111 111 Valuation
Current market price (Rs.) 1,381 1,381 1,381 1,381 1,381 Book Value per share (Rs.) 298 328 351 392 440
Market capitalization (Rs. mn) 153,440 153,440 153,440 153,440 153,440 Adj Book Value per share (Rs.) 290 318 339 381 430
Earnings per share (Rs.) 43.0 43.4 46.0 55.5 62.7 P/ABV (x) 5.4 4.6 3.9 3.2 2.6
Dividend per share (Rs.) 11.00 11.00 11.50 12.00 12.00 P/E (x) 23.5 23.0 20.9 16.7 14.0
Spark Disclaimer
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Absolute Rating Interpretation
BUY Stock expected to provide positive returns of >15% over a 1-year horizon
ADD Stock expected to provide positive returns of >5% – <15% over a 1-year horizon
REDUCE Stock expected to provide returns of <5% – -10% over a 1-year horizon
SELL Stock expected to fall >10% over a 1-year horizon
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0
500
1,000
1,500
2,000
Feb-14 Aug-14 Feb-15 Aug-15 Feb-16 Aug-16 Feb-17
Rs. Sundaram Finance – 3 Year Price and Rating History
Price Target
Report Date Price Target Reco.
31/Jan/17 1,375 1,461 Add
13/Dec/16 1,211 1,281 Add
07/Nov/16 1,345 1,510 Add
02/Aug/16 1,468 1,546 Add
06/Jun/16 1,432 1,509 Add
03/Feb/16 1,360 1,464 Buy
03/Nov/15 1,520 1,640 Buy
26/Aug/15 1,467 1,611 Buy
05/Jun/15 1,470 1,650 Buy
15/Sep/14 1,100 1,320 Buy
Disclaimer (Cont’d)
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